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SEC Advisory Committee Considers Bond Market Liquidity

At its inaugural meeting, the SEC’s Fixed Income Market Structure Advisory Committee (“FIMSAC”) discussed bond market liquidity. FIMSAC was established in order “to provide a formal mechanism through which the Commission can receive advice and recommendations on fixed income market structure issues.”

In opening remarks, SEC Chair Jay Clayton explained that there is significant growth in the corporate bond and municipal bond markets and emphasized that fixed income markets have direct and indirect impacts on other markets. As a result, he said, these markets demand substantial attention from the SEC.

Commissioner Kara Stein highlighted the importance of growing fixed income markets and the transition of these markets from voice-based to electronic trading. She pointed to the impacts of the shifting markets: “spreads are tighter, trade sizes are smaller, and liquidity is increasingly concentrated in certain bonds.” Commissioner Michael Piwowar added that bond market liquidity is an important area of focus, as “fears of possible liquidity shocks persist.” He encouraged further analysis to inform the next steps that might be taken by regulators.

The meeting included perspectives from industry members on bond market liquidity.

The SEC also announced that it will not renew the charter for the Equity Market Structure Advisory Committee, which recently expired. Instead, the SEC will “organize targeted roundtables on discrete equity market structure issues, which will feature experts on each topic representative of a broad diversity of viewpoints.”

Lofchie Comment: Under the prior Administration, regulators simply refused to acknowledge that there were problems in the fixed income markets, perhaps because it would have meant acknowledging that there had been negative consequences to Dodd-Frank. The fact that spreads in certain securities declined, as Commissioner Stein noted, is not evidence of improved liquidity if the size of the orders as to which those spreads relate has declined substantially, or if those orders relate to a materially lesser number of securities. Leadership at the SEC seems to be returning to the regulatory basics: trying to figure out how the market works and how it can be improved.